Estate Preservation: The Durable Power of Attorney

Coupled with a will, the durable power of attorney (durable POA) can be a good alternative to the living trust and guardianships when planning for disability or incompetence. A power of attorney is a document in which one person, the "principal," gives authority to his or her agent, the attorney-in-fact, to act on his or her behalf. Contrary to its name, the attorney-in-fact does not need to be a lawyer.

Like a living trust, the durable POA can avoid the need for a long and unpleasant court proceeding to determine your competence and appoint a guardian. These documents are more familiar than trusts, and they generally cost less to prepare, too. All POAs become invalid at the moment of the principal's death.

For this reason, a durable POA can be a very broad and detailed document, reciting a laundry list of specific powers as they relate to a wide range of financial transactions. In addition to a wide ranging variety of "standard" powers, discuss with your lawyer the inclusion of the following useful, but often overlooked, provisions in your POA:

Power to handle tax matters and deal with the IRS. In the past, the IRS has insisted that its own POA form be used. Now, a specific provision in the taxpayer's own document, conferring appropriate authority, will be honored. Many POA forms lack this clause.

Power to handle retirement accounts and investments. These assets are likely to be substantial. Retirement plan custodians and administrators are appropriately cautious about letting anybody else play with your money. These folks, too, will probably require specific authorization in the POA before allowing your attorney-in-fact to act on your behalf.

Compensation clause. If your attorney-in-fact is a family member, instead of an unrelated professional, should he/she be paid?

Power to make gifts. Larger estate owners often use annual tax-free gifts of up to $11,000 per recipient to gradually lower the taxable estate remaining at death. The principal typically would like that to continue, despite his or her subsequent disability. If so, the power of the attorney-in-fact to make gifts should be specifically authorized and precisely spelled out.

If you are fortunate enough to have a trusted attorney-in-fact, the durable POA can easily and inexpensively provide the peace of mind if you are contemplating disability. But you should understand that this kind of POA takes effect immediately — it does not wait until disability.

Because of the power you place in the hands of the attorney-in-fact, it is imperative that he or she be truly worthy of confidence. Otherwise, it will be very easy for you to become a victim of fraud or theft, now or later. Some people find this thought unsettling. If there is any doubt about this, perhaps the durable POA is just not for you.

An alternative to the durable POA is the springing POA, which waits until a triggering event, such as disability, occurs, and only then "springs" into action. This can pose a big problem: There must be a clear trigger e.g. formal determination of disability, before this POA will be considered operative and be accepted. At best, this means at least a short delay and expense. (A springing POA might provide, for example, that two doctors examine the principal and attest to his or her disability.) At worst, there might be uncertainty, disagreement, or squabbling among doctors and/or family over the degree of the principal's disability. For this reason, banks or others might then balk at recognizing the authority of the attorney-in-fact. When this situation unfolds, the matter often winds up in court — which was the very thing you wanted to avoid.

Did You Know...?
A "special power of attorney" conveys limited powers to the attorney-in-fact. A "health care representative appointment" is granted to make health decisions on behalf of the principal.